Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.

Friday, June 13, 2014

I am reading
things that make me wonder what is going on at the IRS. It repetitively appears
that the agency – or at least influential partisan players – think that the job
of the IRS is to take sides in political issues.

I am looking at Z Street v Shulman. It
is a Court decision from the District of Columbia. There are some interesting
points in here, embalmed in yawn-inducing legalese.

Let’s talk
about this case.

Z Street is
a non-profit corporation. It comes out of Pennsylvania, was organized in 2009
and immediately applied for tax-exempt status. Its purpose is to educate the
public about Zionism; about facts on the formation of the Jewish state; and about
Israel’s right to refuse to negotiate with terrorists.

We know
about that the IRS instituted a policy of 501(c)(4) suppression prior to the
2012 presidential election. The 501(c)(4)s are a different animal from a (c)(3),
the “traditional” charity. A (c)(4) may engage in an unlimited amount of
lobbying, as long as it stays within the issues for which it was organized. If
someone felt strongly about blue M&Ms, for example, I suppose that someone
could organize a (c)(4) and lobby nonstop – as long as they stayed within the issues
concerning blue M&Ms. A (c)(4) can also engage in some partisan political
activity, as long as it does not become its primary activity. There is a price however
for this freedom to till so close to political soil: deductions to a (c)(4) are
not deductible.

Contrast
that to a (c)(3), contributions to which are tax-deductible. As a trade-off,
there are severe restrictions on lobbying activities of a (c)(3).

Anyway, Z
Street applies for (c)(3) status. It wants that tax-deductible status,
understandably. It is possible that – in the future – it will spin-off a
(c)(4).

Here are
some quick dates:

·12/29/09 - applies for exempt status
with IRS

·5/15/10 – IRS send a letter
requesting additional information

·6/7/10 – Z Street provides additional
information to the IRS

·7/10/10 – Z Street’s attorney tracks
down the IRS person (Dianne Gentry) handling the file.Agent Gentry tells the attorney that she has
two reservations:

oZ
Street is engaged in “advocacy” activities that are not permitted under Section
501(c)(3)

oThe
IRS has special procedures for applications from organizations whose activities
relate to Israel, and whose positions with respect to Israel contradict the
current policies of the U.S. government. She further stated, “these cases are
being sent to a special unit in the D.C. office to determine whether the
organization’s activities contradict the Administration’s public
policies."

I am
stunned.

I
immediately pick up on the issue of a (c)(3) and advocacy. I expected that
issue, and frankly, I wonder why Z Street didn’t organize a (c)(4) instead.

But “special
procedures” and the “Administration’s” current policies? My tax-exempt
application is to be judged on whether the Administration “likes” me and
whether I say “politically correct” things? Good grief, bring on Kristallnacht.

Z Street
brought a lawsuit. They alleged that the IRS maintains a special policy when it
comes to Israel and to (c)(3)s whose stance does not agree with the Obama
Administration, and that such applications are subject to special procedures
not applied to other organizations.

What does Z
Street want?

·A declaration that policy is
unconstitutional, and

·An injunction forcing the IRS to
disclose the policy and barring the IRS from employing the same.

The IRS stalled
this thing almost long enough to put your kid through college. I am disturbed that
the IRS core argument seems to be “we can do whatever we want.” Here are their arguments:

(1)The Anti-Injunction Act

The AIA was first enacted in 1867, and states that ”no suit
for the purpose of restraining the assessment or collection of any tax shall be
maintained in any court by any person, whether or not such person is the person
against whom such tax is assessed.”

The IRS argued that the AIA barred the Court from granting
injunctive relief.

(3)The IRS also argued that the case
should be dismissed on “sovereign immunity” grounds.

The Court goes to work:

(1)The D.C. Circuit had already decided
a case (Cohen) rejectingthat the
AIA’s “assessment and collection” language bars any and all lawsuits that might
ultimately impact revenue to the Treasury. It has to be so, otherwise one could
pass virtually any law and render it unreachable by calling it a “tax.”

(2)By its terms, Section 7428 applies
when there is controversy concerning qualification of an organization as a
(c)(3). The only available remedy under Section 7428 is a “declaration with
respect to … initial qualification or continuing qualification.”

The Courts points out that Z Street is not asking the Court
for (c)(3) qualification. Rather it is asking the Court to force the IRS to
follow a “constitutionally valid process” – nothing more and nothing less.

(3)The Administrative Procedure Act
expressly waived sovereign immunity for lawsuits such as this. The APA waives
sovereign immunity for suits for nonmonetary damages that allege wrongful
action by an agency or its officers or employees.

The Court points out the obvious: that is exactly what Z
Street is doing.

Judge
Ketanji Brown Jackson observed:

Defendant struggles mightily to transform a lawsuit that
clearly challenges the constitutionality of the process that the IRS allegedly
employs when it determines the tax-exempt status of certain organizations into
a dispute over tax liability as a means of attempting to thwart this action’s
advancement.”

In legalese,
this is like being punched in the face.

The Court
decided that the Z Street’s lawsuit could proceed. After the IRS files its response,
the case will go to discovery. The IRS will have to pony up what it has been
doing with tax-exempt applications these last few years. Anticipate that Z
Street attorneys will seek depositions from other groups similarly treated by
the IRS.

Good.

If proven, this
type of behavior by the IRS is thuggish and needs to be punished. People need
to lose their jobs, if not their freedom for a while. Perhaps we could build a
Lois Lerner wing at a prison somewhere. Perhaps somewhere near the District of
Columbia so these people would not have to travel far.

Why do I say
this? Our taxation system relies – to an overwhelming extent – on voluntary
compliance. The function of the IRS is to administer and collect taxes and
process records of the same. Whatever our political stance, we can have common
ground on the assessment and collection of tax. We can all hate the IRS
equally.

If we
disagree on tax law, however, we take that disagreement into the legislative arena.
Allow elected representatives to hash it out. At least the representatives have
to run for reelection occasionally, so there is some chance for an accounting
of their decisions and actions. This is greatly preferable – and healthier for
our system of governance – than partisan berserkers bending whatever lever of
government they can access to impose their dogma du jour.

Remember:
there will be a future White House with very different attitudes and values
than the present one. If this behavior goes unpunished, those now in power will
then be out of power, and it will be their views and causes that will be handed
to the tender mercies of the partisan berserkers then in power.

About Me

Thirty years years in tax practice. It's a long time, and I have seen virtually everything short of the fabled tax-exempt unicorn. I was raised in Tampa, went to school in Missouri, taught at Eastern Kentucky University, lived in Georgia, got pulled to Cincinnati when I married, have in-laws in England and a daughter going to the University of Tennessee. I am not sure where I will wind up next, but I hope there is better weather.